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It is hard to disagree that one of the primary goals of most businesses is to maintain high competitiveness and be the main choice of numerous clients. In order to achieve these objectives, it is of vital importance for companies to select appropriate and effective strategies that would help them in the given circumstances. One such approach that may only be beneficial under specific conditions is the low-cost provider strategy, which, at the same time, has some pitfalls that may lead organizations to lose instead of gain profit. The purpose of this paper is to discuss low-cost provider strategy in more detail.
Overall, such a method of becoming more competitive and profitable is aimed at creating a wider base of clients and raising sales. The main tools of this approach are the minimization of costs and underpricing of goods and services (Thompson et al., 2020). For such a strategy to become beneficial and attractive, there should be certain market circumstances and conditions. The first one is vigorous price competition between different sellers because low-cost providers can hold a winning position (Morris, 2019). Then, in a case when the goods sold are almost identical and can be accessed easily, higher-cost businesses lose greatly. Third, differentiation is challenging to be achieved, and consumers select those firms that sell the required product at the lowest prices.
Next, another market condition is buyer low-switching costs, which enables them to shift their purchases to the cheapest firm and become loyal to it. Additionally, if the client base consists primarily of large-volume buyers, it is much more profitable for them and low-cost providers to cooperate, and such clients are more likely to choose to buy at lower prices (Morris, 2019). Finally, it is also essential to view a situation when it is quite easy for new firms to enter the market, and their key option is to start by having lower prices to attract customers. Therefore, constant low-cost providers win again because they do not allow such businesses to receive a great client base.
However, there are situations when pursuing a low-cost strategy may become the providers mistake because they are not careful when considering some pitfalls. For example, some companies are extremely aggressive when cutting their prices, fail to estimate the expected profitability, and end up losing their money because of over-reducing the prices (Thompson et al., 2020). In general, the same may happen if a business is only fixated on decreasing costs ad ignores other impacting factors like technological breakthroughs of other firms, buyer preferences, declining customer price sensitivity, and others (Morris, 2019). Finally, the selected low-cost approach should be unique so that competitors can hardly copy it. Otherwise, this advantage is not long-term, and the efforts of the organization become meaningless. These are some factors that may go wrong if the company fails to assess the risks, consider all the circumstances, and pay attention to other influential conditions.
To draw a conclusion, one may say that a low-cost provider strategy is indeed a practical and effective approach that allows both the firm pursuing it and its clients to gain benefits. It is essential that there is a vast number of market conditions that make this strategy incredibly attractive, but organizations considering or implementing it should remember the key pitfalls. Overwise, if they are not careful in their strive for profit and competitive advantages, they may lose their money and clients instead of gaining them.
References
Morris, J. (2019). Strategic management [eBook edition]. Open Educational Resources: Oregon State University.
Thompson, A., Peteraf, M., Gamble, J., & Strickland, A. (2020). Crafting & executing strategy: The quest for competitive advantage: Concepts and cases. McGraw Hill.
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